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Investor sentiment and firm capital structure

Shengfeng Li, Hafiz Hoque Orcid Logo, Jia Liu

Journal of Corporate Finance, Volume: 80, Start page: 102426

Swansea University Author: Hafiz Hoque Orcid Logo

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DOI (Published version): 10.1016/j.jcorpfin.2023.102426

Abstract

We provide novel evidence of the role of investor sentiment in determining firms' capital structure decisions from three perspectives: leverage ratio, debt maturity and leverage target adjustment. We find that when investor sentiment is high, firms increase their leverage ratios, supporting our...

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Published in: Journal of Corporate Finance
ISSN: 0929-1199
Published: Elsevier BV 2023
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URI: https://cronfa.swan.ac.uk/Record/cronfa63517
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first_indexed 2023-05-22T13:10:21Z
last_indexed 2023-05-22T13:10:21Z
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spelling v2 63517 2023-05-22 Investor sentiment and firm capital structure 06d1239b4524fff9c0a0f52a2a368910 0000-0002-4354-3895 Hafiz Hoque Hafiz Hoque true false 2023-05-22 BAF We provide novel evidence of the role of investor sentiment in determining firms' capital structure decisions from three perspectives: leverage ratio, debt maturity and leverage target adjustment. We find that when investor sentiment is high, firms increase their leverage ratios, supporting our contention that high investor sentiment increases firms' debt capacity and facilitates the use of an aggressive leverage policy. Debt maturity is shorter in high sentiment periods, implying that firms are confident about future earnings and use shorter debt maturity to signal their financial solvency. Leverage target adjustment is slower in low sentiment periods, indicating higher costs of external finance. Furthermore, the sentiment-leverage relationship sensitivity is greater for financially constrained firms. Our extended analysis determines that leverage-increasing firms generate lower stock returns subsequent to a period of high sentiment, offering practical insights into the economic consequences of increasing leverage in high sentiment periods on corporate value for investors. Our research advances the understanding of the impact of investor sentiment on firms' financing decisions and stock returns. Journal Article Journal of Corporate Finance 80 102426 Elsevier BV 0929-1199 Investor sentiment, Capital structure, Leverage, Debt maturity, Debt capacity, Speed of adjustment, Stock returns 1 6 2023 2023-06-01 10.1016/j.jcorpfin.2023.102426 http://dx.doi.org/10.1016/j.jcorpfin.2023.102426 COLLEGE NANME Accounting and Finance COLLEGE CODE BAF Swansea University SU Library paid the OA fee (TA Institutional Deal) Swansea University 2023-12-22T08:05:57.9088035 2023-05-22T14:06:41.8000522 Faculty of Humanities and Social Sciences School of Management - Business Management Shengfeng Li 1 Hafiz Hoque 0000-0002-4354-3895 2 Jia Liu 3 63517__27608__c61221d6edac478b9792c141d315e59b.pdf 63517.pdf 2023-05-24T16:42:05.7145598 Output 648591 application/pdf Version of Record true © 2023 The Authors. Published by Elsevier B.V. Distributed under the terms of a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License (CC BY-NC-ND 4.0). true eng http://creativecommons.org/licenses/by-nc-nd/4.0/
title Investor sentiment and firm capital structure
spellingShingle Investor sentiment and firm capital structure
Hafiz Hoque
title_short Investor sentiment and firm capital structure
title_full Investor sentiment and firm capital structure
title_fullStr Investor sentiment and firm capital structure
title_full_unstemmed Investor sentiment and firm capital structure
title_sort Investor sentiment and firm capital structure
author_id_str_mv 06d1239b4524fff9c0a0f52a2a368910
author_id_fullname_str_mv 06d1239b4524fff9c0a0f52a2a368910_***_Hafiz Hoque
author Hafiz Hoque
author2 Shengfeng Li
Hafiz Hoque
Jia Liu
format Journal article
container_title Journal of Corporate Finance
container_volume 80
container_start_page 102426
publishDate 2023
institution Swansea University
issn 0929-1199
doi_str_mv 10.1016/j.jcorpfin.2023.102426
publisher Elsevier BV
college_str Faculty of Humanities and Social Sciences
hierarchytype
hierarchy_top_id facultyofhumanitiesandsocialsciences
hierarchy_top_title Faculty of Humanities and Social Sciences
hierarchy_parent_id facultyofhumanitiesandsocialsciences
hierarchy_parent_title Faculty of Humanities and Social Sciences
department_str School of Management - Business Management{{{_:::_}}}Faculty of Humanities and Social Sciences{{{_:::_}}}School of Management - Business Management
url http://dx.doi.org/10.1016/j.jcorpfin.2023.102426
document_store_str 1
active_str 0
description We provide novel evidence of the role of investor sentiment in determining firms' capital structure decisions from three perspectives: leverage ratio, debt maturity and leverage target adjustment. We find that when investor sentiment is high, firms increase their leverage ratios, supporting our contention that high investor sentiment increases firms' debt capacity and facilitates the use of an aggressive leverage policy. Debt maturity is shorter in high sentiment periods, implying that firms are confident about future earnings and use shorter debt maturity to signal their financial solvency. Leverage target adjustment is slower in low sentiment periods, indicating higher costs of external finance. Furthermore, the sentiment-leverage relationship sensitivity is greater for financially constrained firms. Our extended analysis determines that leverage-increasing firms generate lower stock returns subsequent to a period of high sentiment, offering practical insights into the economic consequences of increasing leverage in high sentiment periods on corporate value for investors. Our research advances the understanding of the impact of investor sentiment on firms' financing decisions and stock returns.
published_date 2023-06-01T08:05:58Z
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score 11.035634

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